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What is financial literacy and why is it fundamental?

Shashank Agarwal, Finance & Forensic Accounting Professional and Finance Officer, Kasiga School

In today’s fast-paced world, people at large are forced to maintain their professional, social, and economic balance. Everybody is aware of how to behave socially, grow professionally and earn more income for themselves. Recent reforms in the field of education have helped to achieve these outstanding life balances. People learn professional and social behaviour while studying in schools or universities, an essential aspect of life. With the advent of unique courses and degrees in the field of higher education, people can learn not only their area of interest but can also have additional literacy. One such essential and so far ignored literacy is financial literacy. Financial literacy doesn’t mean that everybody should go to universities and learn finance as a core or additional stream. It simply implies that everybody should be able to manage their finances well. Consumers’ financial knowledge and abilities are essential for them to participate effectively in today’s social and economic life. The economic environment, especially its digitalisation, has grown much more challenging and unpredictable, putting some consumers in danger of financial difficulties. The societal ramifications of financial illiteracy are pretty severe to the economy as a whole.

Individuals today are more accountable for their personal finances than ever before. Benjamin Franklin rightly said that “A penny saved is a penny earned.” To save what we earn today, better financial management is quintessential. The breadth of financial goods available to people today, from student loans to personal loans, credit cards, and mutual funds, is vastly different from what it was in the past. Knowledge about these financial products has far-reaching implications on individual well-being.

Moreover, the rapid advancement of financial technology is transforming the way consumers make payments, make financial decisions, and seek financial advice. In this context, it’s critical to determine how financially savvy people are and how much their financial knowledge influences their financial decisions. Financial Literacy is an essential measure of people’s capacity to make sound financial decisions.

Hence, financial literacy is of vital importance for every person to manage personal finances well. After all, knowledge of finance is essential for a person to live comfortably in society. In India, in particular, financial literacy is at its lowest. Even in well-advanced economies, financial literacy is relatively lower. Therefore, it has become indispensable to instil financial literacy in people, preferably young.

Since the establishment of the National Education Policy in 1986, which was updated in 1992 and 2009, a New Education Policy had been long overdue. The government introduced significant reforms in existing education policy and formed a National Education Policy in 2020. The National Education Policy (NEP) is a set of guidelines developed by the Indian government to steer the growth of the education sector. To achieve basic financial literacy as an initiative of National Education Policy, the Central Board of Secondary Education (CBSE) and the National Payments Corporation of India (NPCI) have joined hands to develop a financial literacy curriculum for students of Class VI. For this purpose, they devised to release the “financial literacy Textbook” as part of a new elective course on financial literacy that will allow students to grasp basic financial concepts at an early stage in their Education. The textbook covers broad topics related to financial awareness, basic financial principles, Banking, Digital Payments such as UPI, Cards, Wallets, and more. This book covers everything from basic ideas like cash, banking, savings, and investments to advanced concepts like IMPS, UPI, PoS, mPoS, QR Codes, and ATMs; a student could need to know later in life. The book also elaborates on the function of UIDAI and the importance of the Aadhaar and the Aadhaar Enabled Payment System in the context of digital payment options (AePS).

To make people aware of making better financial decisions, one must examine what they know and what they need to know. Financial Literacy influences saving and investment behaviour, a better ability to deal with unexpected expenses and income fluctuations, mortgage refinancing, debt management, and borrowing patterns. According to research conducted by Organisation for Economic Co-operation and Development (OECD), financially literate people are more likely to accumulate wealth. There are several reasons why better financial knowledge leads to more incredible wealth. People with higher financial literacy are more inclined to plan for retirement maybe because they understand the importance of finance at a later stage of life when there is no regular source of income.

Overall, financial Literacy affects both individuals and society, affecting everything from daily to long-term financial decisions. Ineffective spending and financial planning, costly borrowing, and debt management are linked to low financial literacy levels. These insufficient levels of financial literacy and their far-reaching consequences need immediate attention and corrective actions.

According to various studies, the adults acquiring financial education at a young age are more skilled in managing their financial resources than those who did not. Since parents cannot always teach their children financial management due to a lack of knowledge, skills, time, or motivation, there was a long need to include financial literacy in education curricula throughout children’s compulsory schooling. In my view, primary and higher education students can be easily taught about finances because they study basic financial and economic concepts as part of their course curriculum. And if such education is imparted to them as a part of course design, they can be made more knowledgeable and skilful in making effective financial decisions later in life. It is necessary since making poor financial decisions can lead to excessive debts and consequently impact the ability to manage other elements of their lives. To effectively achieve this, various control variables can be adopted such as, talking about money at home, talking about money in class, peer pressures, etc. The financial literacy program must be designed to be compelling and exciting. Schools and colleges should offer to teach financial education to huge and often varied groups.

In recent years, various countries have implemented and promoted financial education in schools, colleges, and workplaces. For implementing this, financial education programs should be launched with high standards. Since all school teachers and university professors are themselves not equipped with knowledge of finance, a well-devised teacher training program can be effective. Many education institutions have already started conducting seminars, webinars, and teacher’s training programs on financial literacy.

Still, there are three convincing reasons why financial education should be taught in educational institutions. To begin with, it is critical to introduce young people to the fundamental concepts that underpin financial decision-making before making significant financial decisions. Second, schools give financial literacy education to populations who may not be exposed to it or may not be equally exposed. Third, if we wish to encourage higher financial literacy among individuals and society, we must lower the costs of obtaining financial literacy. Personal finance classes in college are also beneficial for a variety of reasons. Finally, financial education should be provided in the community, in locations where people go to study. In India, both primary and higher education institutions should take the responsibility to make the students financially literate.

Financial education can be provided in many different ways. However, few studies of the effectiveness of such initiatives exist, and further investigation is badly needed in this field. Believe it or not, in the few most advanced financial systems across the globe, a lack of financial literacy is a serious challenge that requires immediate attention. Many of these programs to teach financial education in schools, colleges, businesses, and the general public has used existing evidence to develop robust solutions. It’s critical to keep making progress in fostering financial literacy by scaling up and streamlining future programs.

Financial literacy is akin to a global passport that enables people to take advantage of the wide range of financial products available and make profound financial decisions. Financial literacy should be viewed as a fundamental right and universal necessity rather than a privilege enjoyed by a small number of consumers with unique access to financial knowledge or advice. Financial literacy and fundamental literacy, such as reading and writing, should be considered equally vital in today’s environment. Individuals and societies cannot achieve their utmost potential without it.

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